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The most important early customers for your startup usually turn out to be quite different from who you think they’re going to be.

He’s Only in Field Service
When I was at Zilog, the Z8000 peripheral chips included the new “Serial Communications Controller” (SCC). As the (very junior) product marketing manager I got a call from our local salesman that someone at Apple wanted more technical information than just the spec sheets about our new (not yet shipping) chip. I vividly remember the sales guy saying, “It’s only some kid in field service. I’m too busy so why don’t you drive over there and talk to him.” (My guess is that our salesman was busy trying to sell into the “official” projects of Apple, the Lisa and the Apple III.)

Zilog was also in Cupertino near Apple, and I remember driving to a small non-descript Apple building at the intersection of Stevens Creek and Sunnyvale/Saratoga. I had a pleasant meeting and was as convincing as a marketing type could be to a very earnest and quirky field service guy, mostly promising the moon for a versatile but then very buggy piece of silicon. We talked about some simple design rules and I remember him thanking me for coming, saying we were the only chip company who cared enough to call on him (little did he know.)

I thought nothing about the meeting until years later. Long gone from Zilog I saw the picture of the original Macintosh design team. The field service guy I had sold the chip to was Burrell Smith who had designed the Mac hardware.

The SCC had been designed into the Mac and became the hardware which drove all the serial communications as well as the AppleTalk network which allowed Macs to share printers and files.

Some sales guy who was too busy to take the meeting was probably retired in Maui on the commissions.

Your Customers are Not Who You ThinkFor years I thought this “million unit chip sale by accident” was a “one-off” funny story. That is until I saw that in startup after startup customers come from places you don’t plan on.

Unfortunately most startups learn this by going through the “Fire the first Sales VP” drill: You start your company with a list of potential customers reading like a “who’s who” of whatever vertical market you’re in (or the Fortune 1000 list.) Your board nods sagely at your target customer list. A year goes by, you miss your revenue plan, and you’ve burned through your first VP of Sales. What happened?

What happened was that you didn’t understand what “type of startup” you were and consequently you never had a chance to tailor your sales strategy to your “Market Type.” Most startups tend to think they are selling into an Existing market – a market exists and your company has a faster and better product. If that’s you, by all means hire a VP of Sales with a great rolodex and call on established mainstream companies – and ignore the rest of this post.

Market Type
But most startups aren’t in existing markets. Some are resegmenting an existing market–directed at a niche that an incumbent isn’t satisfying (like Dell and Compaq when they were startups) or providing a low cost alternative to an existing supplier (like Southwest Airlines when it first started.) And other startups are in a New Market — creating a market from scratch (like Apple with the iPhone, or iPod/iTunes.)

(“Market Type” radically changes how you sell and market at each step in Customer Development. It’s one of the subtle distinctions that at times gets lost in the process. I cover this in the Four Steps to the Epiphany.)

Five Signs You Can Sell to a Large Company
If you’re resegmenting an existing market or creating a new market, the odds are low that your target list of market leaders will become your first customers. In fact having any large company buy from you will be difficult unless you know how to recognize the five signs you can get a large company to buy from a startup:

They have a problem

They know they have a problem

They’ve been actively looking for a solution

They tried to solve the problem with piece parts or other vendors

They have or can acquire a budget to pay for your solution

I advise startups to first go after the companies thataren’t the market leaders in their industries, but are fighting hard to get there. (They usually fit the checklist above.) Then find the early adopter/internal evangelist inside that company who wants to gain a competitive advantage. These companies will look at innovative startups to help them gain market share from the incumbent.

Sell to the Skunk Works
The other place for a startup to go is the nooks and crannies of a market leader. Look for some “skunk works” project where the product developers are actively seeking alternatives to their own engineering organization. In Apple’s case Burrell Smith was designing a computer in a skunk works unbeknownst to the rest of Apple’s engineering. He was looking for a communications chip that could cut parts cost to build an innovative new type of computer – which turned out to be the Mac.

Lessons Learned

Early customers are usually not where you first think they are

Where they are depends on Market Type

Look for aggressive number 2’s or 3’s who are attacking a market leader

9 Responses

A customer of mine, now a friend, used to wear multiple hats in his company, and in tech/vendor meetings, he would present his business card that would say “Editor”. Whenever he did that most vendors would ignore him in the meeting. Little did they know, that he was also the CTO and the person responsible for making all tech decisions :-)

Folklore has some interesting stories about Burrell Smith (http://bit.ly/joRaK). Here’s the quote from that page: “Burrell Smith’s brilliant digital board provided the seed that the rest of the team coalesced around. Its Woz-inspired creativity set the tone for the rest of the project.”

Terence,
Let start with the iPod first because it’s an easier example.

Other vendors had hardware devices to play music, but only Apple realized that it was the entire ecosystem – getting the labels signed up, having an easy to use on-line store to seamlessly download, the notion of syncing music from your computer, and then finally the hardware. Apple created a New Market which wasn’t about you buying another hardware device and figuring out how to rip and burn yourself. The point about the Market Type is that there were no users or vendors who were doing this. There was no market for doing this. It was something completely foreign and new. Users had to learn about iTunes and its relationship (and value) to the iPod. Apple’s marketing at first was about educating you about the ecosystem of doing something new.

Fast forward to today. Today the iPod market is an Existing Market. Users understand the ecosystem. Demand creation for subsequent iPods can be about the features not about the new idea of iTunes+sync+iPod.

The iPhone had the same story. Hardware device, sync, store. Lots of other vendors made hardware sort of like it, but when they opened up the App Store they created an entirely new device. For the first time a handset vendor is calling the shots at the carrier.

Terence,
Don’t get too hung up the difference. The notion of “Market Type” is there so startups have a metric of when to spend marketing and sales dollars.

It’s easy if you’re in an Existing market – customers know there’s a market, customers can tell you what the basis of competition is, and you have a product better than incumbents on the metrics customers say is important. In this case you spend every sales and marketing dollar you can get your hands on to take market share.

The problem is that every startup instinctually acts like they’re in an Existing Market. They prematurely scale sales and marketing spending before a market may even exist. Therefore the first step is to figure out whether customers know about the need for a product like yours – is there a market. And if not, can you position your product so it addresses a niche of an existing market (resgmenting) or do you have to create a market by yourself (New.)

It would seem to me that most startups would *think* they’re in a new market (hence the desire to startup), but I’d also place the iPod/iPhone into an existing market — whether that market is “MP3 player/smart phone” or “Apple fan” is a different question.

To pile on, it’s also important that it’s *in person* and not only over email or the phone.

People will talk about things in person that they’ll never come up with, not on Uservoice or GetSatisfaction, not even if you schedule a conference call just to get their feedback.

I would be walking the cubical halls and someone would poke their head out: “Hey you’re the Smart Bear guys!” “Yeah?” “I’ve been meaning to ask you something….” This guy would never have picked up the phone.

As another example, I could see which magazines are on people desks, and that tells me where to advertise.

I can make similar comments about watching people use your product.

There’s certainly nothing wrong with gathering feedback any time you can, and travel expenses are rough right now so you make do.

But there’s nothing like in-person interaction to find out what your startup/product/messaging REALLY should be.